Hill International, Inc. (HIL) CEO Raouf Ghali on Q3 2021 Results - Earnings Call Transcript

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Hill International, Inc. (NYSE:HIL) Q3 2021 Earnings Conference Call November 9, 2021 9:00 AM ET

Company Participants

Devin Sullivan – Senior Vice President, The Equity Group

Raouf Ghali – Chief Executive Officer

Todd Weintraub – Senior Vice President and Chief Financial Officer

Conference Call Participants

Pete Enderlin – MAZ Partners

Bill Dezellem – Tieton Capital

Sam Yake – Private Investor

Operator

Good day ladies and gentlemen, and welcome to your Hill International, Inc. Third Quarter 2021 Financial Results Conference Call and Webcast. At lines have been placed on a listen-only mode, and the floor will be open for your questions and comments follow the presentation.

At this time it is my pleasure to turn the floor over to your host, Devin Sullivan, Senior Vice President. Sir, the floor is yours.

Devin Sullivan

Thanks, Tara [ph], and good morning, everyone, and thank you for joining us today for Hill International's third quarter 2021 financial results conference call. Our speakers for today's call will be Raouf Ghali, Chief Executive Officer; and Todd Weintraub, Hill's Chief Financial Officer.

Before we begin, I'd like to remind everyone that certain statements made during this call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and it is our intent that any such statements be protected by the safe harbor created thereby, except for historical information the matters set forth herein, including but not limited to any statements of belief or intent, any statements concerning financial projections our plans, strategies, and objectives for future operations are forward-looking statements.

These forward-looking statements are based on our current expectations, estimates and assumptions, and are subject to certain risks and uncertainties, including but not limited to risks and uncertainties related to the COVID-19 pandemic, the willingness and ability of governments and other clients to undertake and complete infrastructure projects and our ability to maintain and support business development activities. Although, we believe that the expectations estimates and assumptions reflected in our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements.

Important factors that could cause our actual results to differ materially from estimates or projections contained in our forward-looking statements are set forth in the Risk Factors section, and elsewhere in the reports we have filed with the Securities and Exchange Commission, including the unfavorable global economic conditions may adversely impact our business, our backlog may not be fully realized as revenue, and our expenses may be higher than anticipated. We do not intend and undertake no obligation to update any forward-looking statement.

I will draw your attention to Slides 2 and 3, which provide safe harbor information and definitions of the non-GAAP measures, we will be presenting. These non-GAAP measures applied to both the presentation itself and our remarks.

Turning to Slide 4, I'll now turn things over to Raouf Ghali, Hill's Chief Executive Officer. Raouf, please go ahead.

Raouf Ghali

Thanks Devin. Good morning everyone, and thank you for joining us today to discuss our 2021 third quarter financial results.

We had a very strong quarter and I'm happy to report that we demonstrated improvement along several important metrics. We produce $77.1 million of CFR and nearly 8% increase from last year's third quarter driven in large by continued success in our Western U.S. operations, the resumptions of several projects and programs in Northeast U.S. and new awards in the Southeast Mid-Atlantic and Europe. While we are beginning to see many of our markets opening up specifically in most parts of the U.S., Europe and North Africa, we are experiencing some headwinds in the Middle East, which has caused project deferrals. However, we believe that these projects will commence in 2022. Despite these deferrals, we expect that CFR will continue to grow in the fourth quarter. We return to profitability this quarter reporting net income of $1.3 million and adjusted net income of $2.8 million. Adjusted EBITDA rose by 33% to $6.4 million.

We also produced the best bookings score in 2021 with new awards total $92.6 million, producing a book-to-burn ratio of 120%. These new awards covered multiple geographies and end markets; including public utilities, roads and highways, primary and secondary educational facilities and rail and transit. For the first nine months of 2021 new awards totaled $274.5 million resulting in a year-to-date book-to-burn ratio of 121%. Given the $71 million of new bookings we have recorded through November we remain optimistic about new awards activity for the balance of the year and expect to end this year with new awards above last year years booking of $361 million. Finally free cash rose for the second consecutive quarter, reaching $6.1 million. We expect to generate free cash in the current fourth quarter.

Moving on to Slide 5. The next couple of slides highlight some of our recent wins. I want to make special note of a recent award from Southern California Edison, one of the nation's largest utilities that was booked in early October and not part of our $92.6 million in third quarter booking stated earlier on. A new five-year $125 million contract of which Hill's portion is $56 million extends a 10-year relationship to provide project management and support services for assignments from SCE's major projects, organization, transmission, substation, distribution, generation, and asset management strategy and engineering groups. SCE has developed a portfolio of energy infrastructure project totaling more than $11 billion to replace antiquated equipment and add new infrastructure to accommodate population growth. We are honored to support them in this vital endeavor.

Moving on to Slide 6. As you'll see on this slide, our infrastructure wins include provides program management services for the Miami-Dade County Aviation Department’s $5 billion Capital Improvement Program encompass Miami International Airport, as well as the County's executive and general aviation airports. This project will support modernization projects over the next 15 years. Capital program administration support services for the city of Philadelphia's ongoing capital program at Philadelphia International Airport. Construction management and inspection services to the Maryland Aviation Administration until 2026. And last program Hanna has been providing the CMI support services for air site, land site and terminal projects at Baltimore-Washington Thurgood Marshall Airport and Martin State Airport since 2015. Construction management services to the Pennsylvania Turnpike Commission for $200 million PA Turnpike/I-95 Interchange Phase 2 project. The provision services for Phase 2 of the rehab and upgrade of rail route Number 10 in Romania, and project and construction management services for flagship mixed use development insiders, one of the most prominent green and sustainable developments in the country.

Moving on to Slide 7. We are excited that the $1.2 billion infrastructure bill passed the house and is headed to the President's desk. The bill will deliver $550 billion of investment to fortify our national infrastructure over the next five years. From bridges and roads to transit and rail energy, ports and harbors, water and aviation; you'll see the current figures that bill allocates to each one of these end markets. These are areas in which Hill has substantial experience and a track record of successful project completion. Through the first nine months of 2021, 46% of our total new awards were in infrastructure and we won $193 million of infrastructure awards the previous year in 2020. The upgrades contained in this bill are necessary and long overdue to ensure public safety, as well as the efficiency and safe transport of goods across the country. We're also continuing to monitor infrastructure protestant in the EU under the next generation EU initiative. The largest stimulus package ever financed in Europe. At present the €750 billion program is being released to each country and we expect procurement to start by the recipient countries in 2022.

Thank you for your attention. And I will now turn things over to Todd Weintraub, Hill's Chief Financial Officer. Todd, please go ahead.

Todd Weintraub

Thank you, Raouf.

I'll pick things up from Slide 8. This slide provides an overview of our GAAP results for the third quarter of 2021. CFR for the third quarter increased to $77.1 million reflecting business activity, continuing to return to pre-COVID levels, including returns to full staffing on certain existing projects and mobilization on certain newly rewarded projects. As Raouf noted we expect that CFR will grow in the fourth quarter and allow us to hit our CFR guide. SG&A was $28.1 million compared to $25.6 million in last year's third quarter. This included non-recurring and non-cash expenses of $1.8 million and $1.1 million in Q3 2021 and 2020 respectively. Excluding these non-recurring and non-cash expenses SG&A expenses in Q3 2021 were $26.3 million or 81.2% of gross profit compared to $24.5 million or 85.4% of gross profit in Q3 2020. This decline in SG&A as a percentage of gross profit reflected continuing management of expenses to ensure that costs grow more slowly than gross profits resulting in creating operating leverage.

This followed a 470 basis point decline in second quarter of 2021 compared to the second quarter of 2020. The dollar increase from 2020 to 2021 was due to costs related to discontinue ops and SOX remediation, green statement of the Company's 401(k) match and higher labor costs and travel as business activities have continued to increase. We reported operating income of $4.3 million as increased gross profit from higher CFR was offset by $511,000 in foreign currency exchange losses compared to $694,000 of an FX gain in last year's third quarter. We also returned to profitability with net income of $1.3 million or $0.02 per share compared to net income of $2.1 million or $0.04 per share in the prior year period. The variance was due primarily to the factors impacting operating income, just discussed as well as higher income tax expense allocation to the third quarter of 2021.

Moving to Slide 9, as you can see our revenue profile on the third quarter reflected very geographic end market and client exposure. The U.S. continued to lead our operations in the third quarter, driven in large part by infrastructure work. We also continue to have a healthy exposure in the Middle East, Europe and Africa where we maintain a dominant industry position.

Now let's briefly look at our results on an adjusted basis on Slide 10. On an adjusted basis and taking into account the items we just discussed. We reported a 34% increase in operating profit, a 60% increase in adjusted net income and a 33% increase in adjusted EBITDA. Our adjusted EBITDA margin improved to 8.3% from 6.7% in last year's third quarter. These improvements were driven by higher CFR and gross margin, while continuing to manage our costs to grow more slowly in the top line to create operating leverage.

Moving on to Slide 11, we continue to improve our cash position at September 30, 2021, total cash rose to $33.2 million from $28.7 million in the second quarter and $26.7 million in the first quarter of 2021. We continue to expect that our cash position will show further improvement during the current first quarter mirroring our in 2020 in which cash improved in the second, third and fourth quarters following the first quarter use of cash related to seasonality and the timing of cash collections. On a related note, we continue to actively pursue the refinancing of our outstanding debt and our in discussions with both existing and potential or new lenders.

Moving to Slide 12 and as just mentioned, you'll see that we generated positive cash flow for the second consecutive quarter after the largely seasonal declines we reported in the first quarters of both 2021 and 2020. We continue to expect that we will be cash flow positive in the fourth quarter of 2021. Total liquidity at September 30, 2021 was $38.6 million, a $10.3 million increase from June 30, 2021 and $11.3 million improvement from the 2021 first quarter. Total liquidity at December 31, 2020 was $45.9 million.

Moving to Slide 13, our total backlog declined slightly to $660.7 million at September 30th reflecting our positive book-to-burn during the quarter being offset by some negative adjustments to existing backlog. Our 12-month backlog was 247.6 million as compared to $252 million at June 30th. From a geographic perspective, our backlog remained concentrated in the Americas, followed by the Middle East, Asia Pacific, Africa and Europe. With respect to our facilities business these contrasts comprised 8.6% of total Middle East to North Africa backlog as compared to 9.5% of total Middle East and North Africa backlog at June 30, 2021.

Thank you very much for your time and I'll not turn the conversation back to Raouf.

Raouf Ghali

Thank you, Todd.

Now let's move to Slide 14. We have revised our CFR guidance to $305 million to $315 million from $320 million to $330 million, reflecting COVID-19 project referrals in the Middle East and to a lesser degree defers in the U.S. These projects are expected through roll over into 2022 and commence next year. Our adjusted EBITDA guidance for 2021 remains unchanged at $20 million to $22 million although we will likely come in at the lower end of this range.

Thank you for your time today. And I'll ask the operator now to open the call to questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. [Operator Instructions] We'll take our first question from Pete Enderlin with MAZ Partners. Please go ahead.

Pete Enderlin

Good morning Raouf and Todd, and thanks for taking my questions. I really just have one at this point, and that is, well, it's sort of looking at the potential for revenue generation CFR and what I'd like if you could possibly is to give us some sort of greater depth on the, the way that CFR is generated and specifically your win rate over the last couple of years. In other words of all the contracts that you're aware of that have been generated, how have you done in terms of a market share? And also if you could kind of elaborate on that by geographical region and if possible by industry sector. So that's a lot of questions rolled into one, but the basic idea is how you go about generating CFR?

Raouf Ghali

Okay. Pete, I'll take a first step at it, and Todd if you'd like to weigh in later on, please do. Okay. First way, I mean, we're generating CFR, the first step is obviously securing the new award. And the way we generate CFR is really mobilizing people on the assignments. Most of our projects and assignments require our staff to be physically present, if not full time, most – some of the time and most of the times on the job, depending at what phase in the construction it is.

Pete Enderlin

Can you say anything about your success in getting – excuse me; I was going to say, can you talk a little bit about win rates? In other words of all the contracts that have been awarded to you and number of other people, what…

Raouf Ghali

Our win rate, let's start with the U.S., our win rate in the U.S. is probably sitting anywhere between 35% to 45% depending where in the U.S. we are, and in that percentage we include mainly as well some of the recompetes that we have. And that's why it sometimes goes up to 45%, depending on the year. If we have a lot of recompetes, obviously the win ratio goes up. I think worldwide, if you – if we look at it and we put them all in one bunch it will be around the 33% to 35% on the win ratio. So one out of three is probably where we are at right now, unless...

Pete Enderlin

Do you think you can gain the percentage of win rate over the next couple of years?

Raouf Ghali

We always striving to gain it, but what we're also striving right now is to focus more on the larger pursuits rather than focusing on the smaller pursuits, because sometimes it takes – not sometimes, it takes usually the same amount of effort to win a small pursuit than it is to win a major pursuit. So the goal is to first of all, we want to make sure that our clients, we're going after the assigns that really have the legs and the funding part. And the second part is we want to focus more on the larger pursuits rather than focusing on every pursuit. I would rather, if I can keep the ratio of – that ratio, win ratio, but when larger pursuits that'll have a positive – definite positive impact on the CFR going forward.

Pete Enderlin

And one more aspect of all of that is that in some cases you compete with some of the large program managers and construction managers. And in other cases, you cooperate with them. So is there some sort of rule of thumb of how you decide whether to compete or cooperate?

Raouf Ghali

No, there isn't a rule of thumb. It's really – it's very typical of this industry. Many of the cases we compete and many cases we team up with our competitors. Really the basis is what's the best strategy to win? Who's well positioned and how can we make one plus one make three and four. So in each instance we evaluate and based on the winning strategy, that's where we decide who we team up with.

Pete Enderlin

Okay. And I apologize for making one question, evolve into several different questions, but could you also give us any sense of your win rates by some of the major industry segments or categories, such as airports or transportation ports or whatever?

Raouf Ghali

Right now we have been very focused for example on the aviation sector. And our win ratio in the aviation sector is probably higher than the average. I think we're probably at 50% plus on the aviation because we've been really successfully in pre-selling them. Pre-selling our services, teaming up with the right partners, showing our clients really on the value add that we have, and we've invested a lot in the general resources and the team we have on there. I think it would take a little bit too long to go into each one of these end markets. But I'd be more than happy maybe if you'd like to contact Todd and I and you can do a more detailed dive into on this.

Pete Enderlin

Okay. That's great. Thank you very much. Very helpful.

Raouf Ghali

Thank you.

Operator

We'll take our next question from Bill Dezellem with Tieton Capital. Please go ahead.

Bill Dezellem

Thank you. First of all, your book-to-burn has been running at 1.2 for the nine months and for the quarter, sorry, bookings are 20% above revenue as we look out to next year do – would that correlate to 2022 revenue growth of approximately, and I'm thinking CFR revenue growth of approximately 20%?

Todd Weintraub

It'll have the growth, but I don't think you can correlate it because some of these contracts go out more than one-year. So you may not realize it all the additional in one-year. It depends on where and what phase each one of those wins are. If they're in a design phase, for example, you'll have the mobilization probably in the latter part. It could be a three or four year contract. So the first year would be a smaller with mobilization till they go into construction. But the trend of what you described is the correct one.

Bill Dezellem

So directionally revenues are up, but order of magnitude I've gotten a little ahead of myself.

Todd Weintraub

That is correct.

Bill Dezellem

And then relative to Southern California Edison, you'd mentioned that the $56 million of that contract actually is the Hill component, why was that not included in bookings?

Raouf Ghali

Because we were awarded it after the end of the quarter, and so that the numbers equate make sense to all of you and be transparent. We have a cutoff point when we sue them in the book – in the backlog.

Todd Weintraub

And so that – you said that will be included in that fourth quarter in other words, in the fourth quarter bookings.

Bill Dezellem

Great. Makes perfect sense, and that explains part of your success of being up north of $70 million already this quarter.

Raouf Ghali

That is correct.

Bill Dezellem

Okay. Thank you. And then lastly, bear with me as I try to get the concept of this question out. But does the infrastructure bill lead to a surge in spending that that will – that will cause or require those who are doing the spending to use more external project management essentially because of the surge, they would not be able to handle the activity internally and therefore lead to even more demand for you all than just the dollars you might represent?

Raouf Ghali

I believe directionally, again you're very correct. Yes, even before the surge of the spending the agencies have been using our services and our competitive services. So as the dollars even increase the need for those services, we believe will even be more expensive.

Bill Dezellem

And how quickly do you anticipate seeing the benefits from the infrastructure bill of flow through in your bookings?

Raouf Ghali

We'd hope to start seeing some of these bookings start coming in probably in the latter part of next year.

Bill Dezellem

Great. Thank you both.

Raouf Ghali

Thank you.

Operator

[Operator Instructions] We'll take our next question from Sam Yake, Private Investor. Please go ahead.

Sam Yake

Yes. Thanks for taking my questions. One question I had is we've seen a sharp increase in the price of oil recently, and I know Hill does some work in that area. Could you elaborate maybe how the increase in the price of oil may help your business?

Raouf Ghali

Sure. Well the health of the positive increase in price of oil will allow both private and public sector investors to really come back to the table and look at the long-term infrastructure needs and investments that they need to make. But I think it's one of it is the price of oil going up, the other part of it, I think in the Middle East, if that's what we're talking about, and I believe that's what your question is. We have another positive fundamental, which is there has been last several years complex within the region. And those as well have also been settled and it's a much calmer and a more stable environment politically. So we believe that both of those factors will impact us positively on both the need for our services and the opportunities that we meant to have.

Sam Yake

And do you have any update for us on the Libya situation? I know you made some hopeful comments about that. Is there any update you can give us?

Raouf Ghali

We continue to be talking to the Libyan government. We have been successful in collecting some of the funds; I believe last quarter, some minor funds. We still expect to be collecting most of them, if so, I should correct that. We expect to be collecting all of our funds. As things are stabilizing in Libya – Libya, they're going through an election at the end of December where we believe that, or we're hoping to have the stabilized government, freely elected government to bond there and therefore things will come back to normality. We have been in very, very deep talks with them and serious talks of them wanting to go back to work, wanting their priority projects, which one of the priority projects are the projects with the educational facilities. So we're very hopeful, bullish, and confident that we will be getting our money back.

Sam Yake

Okay. That sounds good. Thanks so much.

Raouf Ghali

Thank you for our

Operator

Our next question we will return to Pete Enderlin with MAZ Partners. Please go ahead.

Pete Enderlin

Well, I'm sorry. I was going to ask the same question. It was just asked and I couldn't figure out how to withdraw my request to enter the queue. So thank you very much.

Raouf Ghali

Thank you.

Operator

And for our next question we'll return to Bill Dezellem with Tieton Capital. Please go ahead.

Bill Dezellem

Thank you. I'll actually jump on the Libya bandwagon. Relative to the rising oil prices does that have much of an impact on Libya's interest and ability in repaying you?

Raouf Ghali

No. From what I know and understand, I think Libya's reserves are quite healthy. What they owe us is, I don't think would make not even a drop in the bucket as they say with their reserves. But what does help is? [Technical Difficulty] and we always said this, that our ability to be able to recover or our funds from Libya it's not contractual, because they've never denied it, and it's not financial. It's about political stability and once the country is stable things go back to normal and they've recognized the debt and they have the money to pay for it. Obviously having high prices in oil makes it much easier because having more funds is a lot easier to pay.

Bill Dezellem

Is it your sense that the election results are going to matter in terms of your opportunity to be paid or no matter what the outcome of the election, just the fact that it will be over you anticipate that that will that will be helpful?

Raouf Ghali

We believe stability is what's required. It doesn't matter who I believe will be in charge. Once the country has stability, things should be looking much more positive for the country and for us.

Bill Dezellem

Great. Thank you.

Operator

And there appear to be no further questions at this time. We'll turn the floor back over to the management team for closing remarks.

Raouf Ghali

Thank you very much. We will be presenting upcoming conferences this fall, including the Southwest IDEAS in November, and we hope to speak with you. Thank you all very much for your time and have a wonderful day.

Operator

This does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time and have a great day.

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